11/16/1998 @ 12:00AM

Deals: A nasty conglomerate

EXAMS ARE TWO DAYS AWAY, and stressed-out students at MCP/Hahnemann School of Medicine are blowing off steam by hitting Ping-Pong balls, lifting weights and tossing a football.

Just another college scene but for this: Philadelphia’s MCP/Hahnemann is mired in bankruptcy. Some of its top doctors are deserting, including most recently the prominent orthopedic specialist group led Dr. Robert Booth. Applications for the class of 2002 have fallen 17% from last year. Seeking to calm furious alumni, student and alumni liaison Andrew Klein says: “I told them it’s the same old Hahnemann and MCP you went to, except now it’s owned by a massive nasty conglomerate called Allegheny Health & Education Research Foundation (AHERF).”

Medical schools? Conglomerates? The sad tale begins in 1986 with the arrival of a new chief executive at what was then called Allegheny Health Services, which ran the venerable Allegheny General Hospital in Pittsburgh. Sherif Abdelhak had arrived in Pittsburgh from Egypt in 1971 at age 25 and landed a job as a food service coordinator for the hospital. He rose through the ranks, worked briefly at another Pittsburgh area hospital and was recruited back as Allegheny chief executive in 1986.

Abdelhak had big ambitions. It was a period of hospital consolidation, and he began adding new hospitals, eventually acquiring 14 more. He also created a network of private practices with 300 doctors in the Philadelphia area, whom he grossly overpaid. In 1988 he acquired the Medical College of Pennsylvania and in 1993 he persuaded Hahnemann to join the system to create, in effect, an academic medical center chain.

At its height in 1997 Allegheny was Pennsylvania’s largest health system, with $2.3 billion in revenues, 30,000 employees and more than a million patients per year. AHERF had taken on $1.3 billion in debt, a billion of that in municipal bonds peddled by firms like Merrill Lynch, mostly to yield-reaching mutual funds.

AHERF had nonprofit status, but Abdelhak paid himself $1.2 million in 1996, plus a low-cost loan and use of a $938,000 house in the tony Pittsburgh suburb of Sewickley Heights. AHERF’s corporate jet was at his disposal for trips to visit AHERF’s Cayman Islands-based insurance subsidiary. He also had expensive hobbies such as racing Arabian horses.

All the while hospital occupancy rates were falling, and government and insurance company reimbursements slowing. In 1995 Moody’s downgraded one of AHERF’s bond issues to junk status because it was concerned about the chain’s rapid growth. None of this slowed Abdelhak’s tax-sheltered business empire. Longtime accountants PricewaterhouseCoopers didn’t seem to mind, either.

Last year Abdelhak bought Graduate Health, a three-hospital system in Philadelphia. He went on acquiring, ignoring a 1996 report by the Pennsylvania Economy League that warned about the dismal state of Philadelphia’s health care market.

But by now AHERF was bleeding. In 1997 AHERF is estimated to have lost $100 million.

At last AHERF’s board woke from its sleep. It fired Abdelhak this June, and a month later filed for bankruptcy. The SEC is investigating AHERF, and the Pennsylvania attorney general’s office is looking into whether AHERF officials misappropriated the nonprofit’s charitable gifts. A long line of unhappy creditors awaits, an estimated 80,000 names in all, including the Red Cross, the Pittsburgh Pirates and the exclusive Aronomink golf club.

Just about 90 days before the conglomerate filed for bankruptcy, it paid a Mellon-led consortium $87 million in loans it had outstanding.

Many bondholders won’t be as lucky. About $400 million of the bonds were insured by bond insurer MBIA, which guarantees timely payment of principal and interest, and several banks. At least $160 million of the bonds are not guaranteed and some are now being offered at less than 25 cents on the dollar.

In September the bankrupt trustees agreed to sell 8 of AHERF’s 14 remaining hospitals to Tenet Healthcare Corp., a California-based, for- profit hospital network. Tenet also agreed to buy Allegheny University of the Health Sciences, parent of MCP/Hahnemann. Tenet paid a total of $345 million.

Of the proceeds $60 million is earmarked for Allegheny University, which will be taken under the wings of Philadelphia’s Drexel University.

Drexel also gets $50 million from creditors to help run the university.

After debtor-in-financing is repaid, only $130 million will be available for all the other creditors.

About the only ones coming out whole are the 4,000 students at Allegheny University. They’ll get their accredited diplomas on time.